What is a net lease in commercial real estate?
Net lease real estate agreements require lessees to bear specific costs in addition to the rent for a commercial property. These costs can typically include property taxes, insurance, and maintenance charges.
In other words, a net lease transfers some or even all the responsibility for property-related expenses to the lessee. To compensate for this, in some scenarios, the landlord could reduce the rent.
Net lease vs gross lease
A gross lease works differently from a net lease. In gross leases, the burden of all property-related payments falls on property owners. The lease contract stipulates that the lessee will pay a flat rental fee to the landlord. The landlord must pay property taxes, insurance fees, and maintenance costs.
Types of net leases
Net leases fall into several different categories. When entering a lease contract, property owners and lessees can choose between a single net lease, a double net lease, or a triple net lease. However, remember that the landlord usually decides which net lease real estate agreement will be used.
1. Single net lease
In a single net lease, the lessee is responsible for paying a part of the property expenses. In most instances, these leases require the tenant to bear property taxes in addition to rent.
2. Double net lease
Double net leases, or net-net leases, are the next category of lease contracts that commercial real estate investors need to be familiar with. This type of net lease real estate agreement requires the lessee to bear a greater share of the costs related to the property.
Net-net leases impose the onus of property taxes and insurance premiums on the lessee. Thus, the tenant is responsible for two categories of property expenses: taxes and insurance premiums. Of course, the rent for the property is payable as well.
3. Triple net lease
Triple net leases go one step further. Also referred to as a net-net-net lease or an NNN lease, triple net leases obligate the lessee to pay property taxes, insurance premiums, maintenance costs, as well as the rent for the property.
In triple net leases, tenants practically play the role of property owners as far as building expenses are concerned. The lessee bears most of the costs. However, it is usual for the landlord to continue to pay for major upgrades or other capital expenses.
4. Modified net lease
As its name implies, a modified net lease does not fall into any distinct net lease category. It is neither a single net lease nor a net-net lease, nor a triple net lease. A modified net lease falls between a gross lease and a triple net lease. The lease agreement is modified or tailor-made to meet the exact needs of the landlord and tenant.
Consider a situation where the landlord wants the tenant to pay the property tax and a percentage of the maintenance expenses. The landlord would bear the insurance premiums. The landlord and the tenant would enter into a modified net agreement in these circumstances.
The following table summarizes the features of the different types of net leases.
Types of net leases – who pays what
| Type of net lease | Tenant is responsible for paying: |
| Single net lease | Rent + property taxes |
| Double net lease | Rent + property taxes + insurance premiums |
| Triple net lease | Rent + property taxes + insurance premiums + maintenance costs |
| Modified net lease | Depends on the terms of the contract |
Benefits of net lease in real estate
Adopting a net lease structure can hold advantages for both the real estate investor and the tenant.
For investors: Many commercial real estate investors think that net leases offer the perfect route to buying property. A net lease provides landlords with all the advantages of owning real estate without any of its hassles. An NNN lease, for example, puts the responsibility for property taxes, insurance, and maintenance charges on the tenant. The landlord receives a steady rental income stream and spends minimal time on administrative issues.
For tenants: Tenants benefit, too. For one, in an NNN lease, they have more control over property maintenance. They can take steps to ensure that the upkeep of the property meets their standards. Additionally, in a net lease, the landlord usually lowers the rent to compensate the tenant for taking over the responsibility for property-related payments.
Pros and cons of net lease agreements
As seen above, a net lease offers several advantages. However, tenants should remember that these leases have their drawbacks, too. The following table describes the pros and cons of net leases from the tenant’s viewpoint.
Pros and cons of net lease agreements from the viewpoint of the tenant
| Pros of net leases | Cons of net leases |
| Landlords are usually willing to offer long-term leases to tenants. | Tenants must spend time on administrative tasks, such as negotiating maintenance contracts, buying insurance, and paying property taxes. |
| Tenants have control over maintenance and can ensure the upkeep is up to their standards. | The tenant practically plays the role of the property owner but does not get to own the property. |
| Expenses can be kept under control as tenants can negotiate maintenance contracts and shop around for the best insurance rates. | Costs fluctuate from year to year. This may make expense budgeting difficult. |
| Top-rated properties are usually available on net leases. Tenants who insist on a gross lease may miss the opportunity to rent the best properties. | Extensive damage to the property caused by an accident or a natural calamity could result in a spike in repair costs. |
| Tenants can modify properties to suit their needs. | An error in paying property taxes may lead to fines and penalties. |
| The landlord may lower the rent as the tenant takes over the hassle of meeting building expenses. | A long-term lease may reduce the tenant’s flexibility. The cost of ending the agreement before its expiration date may be high. |
Important tips on commercial net leases
Here are some points you need to remember when entering a commercial net lease contract:
- Resist the urge to do it yourself: A real estate broker can be of great help in negotiating a net lease. The amount you pay the broker may be insignificant compared to the savings you can make or the trouble you can avoid.
- Consider hiring a lawyer: A commercial lease contract can be a complicated document. An attorney could help you with redlining a contract or with drafting. Lawyers can also provide advice during negotiations.
- Check the agreement clause by clause: Remember, the devil is in the detail. An innocuous word in the agreement could have significant financial implications months or years later. Pay special attention to the provisions that address common maintenance fees. If there is an ambiguous word or sentence, you can be sure that the other side will interpret it in their favor.
- Analyze the numbers: Landlords should carefully review the amount they expect to earn in rent and the sums they will have to spend on building expenses. Tenants should do a similar exercise. Doing this can help prevent unpleasant surprises down the line for both parties.
- Making alterations to the property: Discussing this point and putting everything down in the agreement can help prevent disputes. Remember to address who bears the cost for each category of alteration.
How do you know which net lease is the best for you?
Net leases effectively pass on the responsibilities of property ownership to tenants without transferring legal title. Hence, a tenant who wants greater control over the property would do well to opt for a net lease. From the property owner’s viewpoint, net lease investments are for landlords who want the benefits of property ownership without its responsibilities.
You can use the following table to guide you on the choice of net lease:
How can a tenant choose which type of net lease?
| Type of net lease | Tenants’ responsibilities, in addition to rent payments |
| Single net lease | Tenants pay only property tax; all other payments are the landlord’s responsibility. It is a good option for tenants who do not want to get involved in the nitty-gritty of building maintenance and insurance. |
| Double net lease | Midway between net leases and triple net leases. |
| Triple net lease | Tenants have almost complete responsibility for the property. Choose this option if you want near-complete control. |
| Modified net lease | You can tailor the agreement to meet your specific needs. |
The bottom line
Net leases transfer the responsibility of building expenses to the tenant. While a single net lease requires the tenant to pay property tax in addition to the rent, an NNN lease passes on most property-related expenses to the tenant. However, commercial real estate investors and tenants would do well to remember that, ultimately, the agreement between the landlord and the tenant, and not what the lease is called, determines who is responsible for each category of expense. Both sides must work together to find an arrangement that best meets their needs.
